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The local factory noticed that each of the following combinations of capital and labor produced the...

The local factory noticed that each of the following combinations of capital and labor produced the same level of output: (L=1, K=20) (L=2, K=15) (L=3, K=11) (L=4, K=8) (L=5, K=6) (L =6, K=5). This evidence suggests that:

Question 23 options:

capital and labor are perfect substitutes.

the isoquant is convex.

capital and labor are perfect complements.

there are decreasing returns to scale.
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Answer #1

Solution:

With each of the given labor-capital combinations, notice that as labor increased by 1 unit, each time the amount of capital given up decreases:

Labor increase from 1 to 2: capital decrease from 20 to 15, so capital given up = 20 - 15 = 5 units

Labor increase from 2 to 3: capital decrease from 15 to 11, so capital given up = 15 - 11 = 4 units

And so on till last additional unit of labor, which results in 1 unit of capital given up (from 6 to 5). So, this production function undergoes diminishing marginal rate of technical substitution. Such diminishing rate gives the production curve or isoquant (production curve giving same output level for different labor-capital combinations) a convex (to the origin) shape.

Thus, the correct option is (B).

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